An extremist, not a fanatic

August 04, 2011

Self-fulfilling beliefs

The fact that Spanish and Italian bond yields are near 14-year highs matters for a simple reason - market opinion is self-fulfilling. If investors think Spain and Italy will be unable to service their debts, borrowing costs will rise so much that they will indeed be unable to do so.This is an example of what John Searlecalled self-referentiality. There are some beliefs which can be true by virtue of enough people believing in them, for example:- These scraps of paper in my pocket have value because others believe they have value, and so treat them as money. - If enough people believe a monetary expansion will lead to higher prices, rather than to increased output, then it will do so, because inflation expectations will rise, and so firms will raise prices in anticipation of others doing so. - Insofar as the press have power, it is because (some) people believe what they read. One effect of “hackgate” could be reduce the credibility of the press and hence its influence.Feel free to add other, better, examples. But here’s my question. Could it be that some aspects of “neo-liberal” economics possess this self-referentiality?For example, if high earners believe high taxes are unfair, then they are more likely to stop work; no-one likes being ripped off. Or if firms believe that corporate tax cuts stimulate investment, they are more likely to invest if only because they expect other firms to invest and thus increase demand for their products.The econometrician, looking at the effect of high income taxes or corporate tax cuts, might then infer that they have the effects that neo-liberals predict. But this is only true because people have neo-liberal beliefs. If they believed that high taxes were a just contribution to society, they’d be less likely to reduce their labour supply. If they thought the effect of taxes on investment was small, firms wouldn’t invest in anticipation of others’ investment, so there’d be no investment boom.Let’s go further. Imagine we lived in a society described by Joseph Carens in his out-of-print book Equality, Moral Incentives and the Market. In such a society people are egalitarians; they believe their talents do not entitle them to higher than average wages. Carens shows that this can reconcile equality and efficiency. Pre-tax wages are unequal, as now, and (some) folk choose the job that will maximize pre-tax wages on the grounds that doing so maximizes their contribution to society. But the tax system equalizes post-tax wages and no-one much objects because they are egalitarians.In this society, the neo-liberals’ prediction that redistributive taxes reduce effort is plain wrong - it doesn’t.So, what is the difference between the neo-liberal society and Carens’ society?Bone-headed right-wingers will claim that the neo-liberal society is the real one we live in. But this begs the question. It’s possible that - insofar as neo-liberalism is true (and for the purposes of this piece I’m making the massive assumption that it is), it is true only because believing makes it so. If we had Carens-style beliefs, an egalitarian society would be self-fulfilling too.Which leads me to a thought. Even if the economic “facts” seem to support neo-liberal ideas, this does not suffice to rule out radical change, because those facts might be true only by virtue of a particular set of beliefs. And if these beliefs are malleable in a Carens-ward direction, then socialism might have validity, even if the facts appear to suggest otherwise. It could be that every word Tim Worstall has written about Richard Murphy is true - and yet irrelevant.

Is this not, in large part, what social scientists who work with the idea of performativity are arguing? People act as if a particular theory is descriptively accurate ('perform the theory') and in the process transform the world into something that approximates the theory more closely. (See also 'virtualism'). That argument has been applied to the financial markets and the housing market, as well as elsewhere.

It also has links to that older literature on things like whether studying economics makes you more selfish (the old experimentaly work around free riding - economists free-ride, does anyone else?)

If the prevailing narrative is one about tax rates of 50% on high earners being either unfair or inefficiency because they reduce the incentives to effort then I'm sure that will influence not only how many people think about the issue but also the motivations of those earning at this sort of level who are not already driven primarily by the money.

But that is just to say that we cannot really understand economic behaviour except in an institutionally sensitive way, and social norms are some of the most powerful institutions.

Aren't you referring to Krugman's "confidence fairy"? That's what it is a fairy. The self fulfilling nature of neo-liberal rhetoric is that even if tax cuts do not stimulate the economy as predicted but increase the deficit, they will argue you must cut taxes even more - which self-fulfil economic dissipation and inequality.
Let's face it, people are not that naive, they are gambler with a very poor track record due to excessive optimism. The layman knows that it's all about getting richer at the expense of the masses, the only reason why these pseudo-beliefs are so popular is that, like in a lottery, everyone believes they might be the lucky one hitting the jackpot one day if they work hard.... This is the real self-fulfilling prophecy, it's a prisoners' dilemma, once again, people put up with increasing inequality because they hope they will someday find themselves on the winning side not realising that the odds are stacked up against you....shame.

For this to be correct I think it would mean that everyone would have to actually believe in a particular ideology, bosses would have to be either Neo-Liberals or Egalitarians. In fact ordinary people would have to be ideologues of some persuasion.

In Converse's 'The Nature of Belief Systems in Mass Publics' he makes the point that ideology is a pursuit of elites. The general public tends to have little in the way of a consistent ideology and the views of most people are a hodge podge of conflicting ideas. Elites tend to interpret the views of the general public in ideological terms because this is how they view politics.

It seems perfectly possible that ideologies can involve self-fullfilling beliefs, but how many people actually subscribe to an ideology of any kind?

@ Adam - I think theory without data is pointless, but not necessarily for the reasons suggested here. It's perfectly coherent for someone to believe that high taxes (net) reduce labour supply because of a neoliberal social norm, whilst having pro- anti- or no view on the desireability of that norm.
@ Alex - yes, performativity is what I'm driving at. And norms too.
@ Paolo - I'm not sure what the difference is between the confidence fairy, which Keynesians don't believe in, and animal spirits, which they do.
@ Jimmy - it doesn't require that everyone have an ideology, merely that a (small) preponderance of folk do have neo-liberal-type prejudices, such as "high taxes on me are unfair". This alone gets my story going.

Your basic point though, was also seen by....Hume(?IIRC). If people were all perfectly altruistic (which means they all agree on a common objective, whatever that may be) we wouldn't need property rights, or indeed much of anything that makes up the market economy. (Though there might still be the Hayekian problem of ccordinating their individual plans and information towards meeting that common objective).

"Which leads me to a thought. Even if the economic “facts” seem to support neo-liberal ideas, this does not suffice to rule out radical change, because those facts might be true only by virtue of a particular set of beliefs. And if these beliefs are malleable in a Carens-ward direction, then socialism might have validity, even if the facts appear to suggest otherwise. It could be that every word Tim Worstall has written about Richard Murphy is true - and yet irrelevant."

Of course. Bertold Brecht pointed this out some time ago. Everything changes if you can elect another people.

and what suffices to rule in radical change? How do we, for example, assess the probability of "radical change" achieving anything beneficial, even when "beneficial" endogenous, without any reference to present realities, however they came about?

@ Tim, Luis - the question is: are beliefs malleable? The fact that attitudes to homosexuality, feminism & racism have changed within living memory suggests so. But I'll concede the evidence isn't overwhelming, and for all its talk about hegemony and narratives, the left has proven itself pretty abject at effecting belief change.

@Chris, the difference what causes what:
Confidence fairy: drop taxes so that firm invests which creates jobs and disposable income which create demand and so on and so forth
Animal spirits: unless there is a prospect of demand animal spirits will be subdued, firms will hold on on investments, no job creation less disposable income, less demand and so on and so forth

BTW, my main point is that your argument is far too simplistic, that people know what the neo-liberal ideology is all about nowadays, and just fancy they may be the winners out of a system that creates huge inequalities, expectations that on average will be regularly proven wrong

One could say that nobody is buying the neo-liberal rhetoric NOW, it's just that since everyone believes they are middle class (or worse) and not rich, it IS unfair to tax them and not those fat cats. In this case aversion to higher taxes comes not from neo-liberal beliefs but rather the idea that, well, woe is me.

Even egalitarians then would have a political problem in suggesting to people that they are in fact wealthy enough to fork over more moolah (after all, those millionaire/billionare fat cats aren't numerous enough to carry the entire burden).

Hhmmm... fascinating stuff - even if only as a thought experiment. One wonders how big government would be in Carens world.
No one would be paid "more" of course since firms wouldn't need to. Oh no - scrap that - they would cos of scarcity of certain skills. But then what about other types of wealth like shares and land and ownership of assets and capital in general.

As Nick Rowe states, your reference to Carens' work confuses beliefs and values. Yes, if we were perfectly altruistic, the excess burden of taxes would be zero. But then, such folks wouldn't have much use for a market economy. In reality, we're only partially altruistic. So yes, the adverse incentive effects of taxation are reduced, but only if the government spends tax revenues efficiently, on things that altruists will approve of.